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Redrado’s era nears its end

Martin Redrado looks sets to lose his job as central bank governor of Argentina for standing by his principles. Someone will regret that, but it probably won’t be Redrado.

Update 3 February 2010

After a turbulent week in Buenos Aires, Martin Redrado’s days as central bank governor of Argentina look numbered. His departure will be Argentina’s loss.

In December, president Cristina Kirchner issued a decree stating that the central bank had to supply $6.6 billion in reserves to meet the country’s financing needs. The money represents a change to the initial budget set out last year; the pesos set aside to pay for dollar reserves would be retracted and placed in a separate debt-repayment fund.

Redrado has refused to agree to the request. He fears that central bank reserves could be attached to government assets and therefore seized by the holdout bondholders from the 2005 debt restructuring. He also believes, quite rightly, that such a move would compromise the central bank’s autonomy.

Kirchner claimed the funds were needed as a liability management tool and would be used to buy back sovereign debt. This, she argued, would reassure bondholders and demonstrate Argentina’s willingness to pay debts that mature within the next 12 months.

Her argument is disingenuous.

If Kirchner has decided that a new market-friendly stance is important then why didn’t her government buy back the debt nine months ago when it was trading at near to 20 cents on the dollar, rather than wait for the bonds to rally to a 12-month high?

Perhaps a clue can be found in the opinion polls – Kirchner’s approval rating is at an all-time low. She needs money to spend on social programmes to shore up her core voter base.

With Redrado refusing to play ball, however, Kirchner issued a decree on January 7 to remove the governor from office. Redrado had both this and the decree on reserves overturned by a judge as unconstitutional. He has returned to office.

A congressional committee is due to meet tomorrow, January 26, and present their opinions to the president. There is growing expectation that the group will advise a compromise: that Redrado should leave his post at the central bank and that the president should retract her decree on the $6.6 billion fund. Kirchner is not legally bound to accept the advice but is expected to.

As for Redrado, Kirchner’s supporters could justifiably argue that his position is at odds with similar situations in the past. In January 2006, for example, Kirchner’s husband, Nestor who was then the president, asked the central bank for reserves to pay $9.57 billion to the IMF. Redrado agreed despite it going against the very principles he now claims to be standing by.

Of course the role of central bank governor of Argentina has long been one of the toughest jobs around, beset by a particularly volatile mixture of domestic and international pressures. Against this state of flux, Redrado has brought a level of stability and transparency that has served his country well.

But this could be the battle Redrado cannot win. His principled stand was welcomed initially but some now feel that Redrado saw a chance to stand up against the president because of her sliding popularity.

The Private Bank Association of Argentina, a lobby group for the country’s leading banks, no longer backs him. “We believe that the central bank governor should resign and through his resignation, he ought to contribute to preserving the stability of the system,” said the Association in a report at the weekend.

The political wrangling could jeopardize the planned swap of $20 billion of defaulted bonds that were excluded from the 2005 restructuring – a transaction the government must do soon if it wants to return to the international capital markets. A quick end to the situation is needed.

If Redrado goes now, his reputation will be intact and will possibly be enhanced in time, especially if the central bank wobbles without his steady hand at the tiller. But if Kirchner’s popularity continues to wane, or international markets withdraw their support for Argentina, then it is the president who will rue falling out with her esteemed central bank governor.

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